Kansas Bioscience Authority
Audit Committee of the
Board of Directors

Tuesday, October 6, 2009
10:30 – 11:30 AM CT

Call to Order: A quorum being present, the meeting of the Audit Committee of the Kansas Bioscience Authority was called to order at 10:33 a.m. on October 6, 2009, by Chairwoman Sandra Lawrence. Additional Directors participating by phone were Governor John Carlin, Reggie Robinson and Bill Thornton. The KBA staff in attendance included Tom Thornton, Jan Katterhenry, Ruth Salle and Marsh LoScalzo. Jeff Ellis, Lathrop & Gage, was present representing legal counsel, and Shelly Hammond, CPA with Allen, Gibbs & Houlik, L.C., CPAs, was present.

Ms. Lawrence referred the Committee to the Audit Binders and Committee Handbooks previously sent to the members of the Committee.

Review of Committee Charter: Ms. Lawrence noted that the Audit Committee reviewed its charter and asked Mr. Ellis to address the recommended changes:

On page one, second paragraph, the charter currently says, “The Chair of the Governance Committee of the Board will determine the number of members of the Committee from time to time, which number will not be less than three.”

It is recommended to change to the following, “ The Chair of the Board will determine the number of members of the Committee from time to time, which number will not be less than three. This change reflects it is the Chairman of the Board not the Chairman of the Audit committee that will determine the number of members.

On page one, second paragraph, third sentence, the charter indicates the following, “The Chairman of the Board will appoint the members of the Committee from among the voting directors on the Board. It is recommended striking the word “voting” from the charter.

On page two, second paragraph the last sentence states “The Chairperson of the Board will cast the deciding vote to break any deadlocked vote of the Committee”. Mr. Ellis clarified that casting a deciding vote by a chairperson would normally be done by Chair of the Committee not the Chair of the Board, if there was a situation with a tie vote, it would need to be recommended to the board for consideration anyway. Therefore the sentence was irrelevant and should be stricken from the Charter.

After thorough discussion, Ms. Lawrence asked for a Motion to approve the changes to the Charter. Mr. Bill Thornton moved to approve the changes, Governor Carlin seconded. The Motion carried.

Governor Carlin inquired of Mr. Ellis if the Committee engaged in a discussion regarding shift of responsibilities from the Audit Committee to the Governance Committee. Mr. Ellis noted that the Audit Committee is responsible for financial reporting and internal controls while the Governance Committee is responsible for the legal compliance. The change was made in Audit Committee. The governance charter remains to be changed at the Governance Committee.

Committee Schedule: Ms. Lawrence noted that the Committee meets infrequently around the Audit and recommended that the next meeting of the Committee be held in the spring of 2010 in preparation for the audit again in the fall to receive the audit. Ms. Katterhenry remarked that a spring meeting should be scheduled to discuss the upcoming audit and then we may need a brief meeting between the spring and the annual meeting to discuss the engagement and fees.

Responsibility Matrix: Ms. Lawrence referred to the Audit Committee Handbook and the Responsibility Matrix which is a guideline outlined in the charter to set timeframes for responsibilities within the Committee and how they fall on the calendar. Ms. Hammond reviewed the matrix and confirmed that it looked like an appropriate schedule.

Review of 2009 Audit:

Required Communications by Auditors.

Ms. Lawrence referred the Committee to Tab 5 of the Audit Committee Handbook to the engagement letter that was signed regarding the procedures performed for the 2009 audit.

Ms. Katterhenry directed the Committee to the Audit Committee Binder Tab 2 to the 2009 completed Audit. Ms. Katterhenry introduced Shelly Hammond, the auditor from Allen, Gibbs & Houlik, L.C. Ms. Hammond reported on the audit opinion(s) and the Required Communications letter.

The audit opinion was included in the financial statements. The audit opinion provided an unqualified, clean opinion which is considered the highest level to achieve from an audit. The audit provided reasonable assurance that the financial statements prepared by management were not materially misstated.

Ms. Hammond referred the Committee to the back of the audited financials to a second audit opinion performed in accordance with the Government Auditing Standards which is a separate set of guidelines to follow that incorporated various aspects of internal controls and compliance into the consideration of preparation of the audit. The opinion report was clean with no findings related to internal controls or compliance within the financial statements.

Ms. Hammond then referred the Committee to the Required Communications Letter and noted the highlights.

Accounting policies. The KBA did not adopt any significant new accounting policies nor have there been any changes in existing significant accounting polices during the current year.

Management’s Judgments and Accounting Estimates. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. The management informed AGH that they used all the relevant facts available to them at the time to make the best judgments about accounting estimates.

Portfolio Investments: It was determined the debt and equity financing extended to various companies would be recorded using the cost method of accounting (at the value initially invested not fair value which is not easy to determine). Accounting standards allow at cost method, but management is required to review for potential impairment. There were no impairments found.

Notes Receivable: Require a subjective evaluation of collectability of notes. It was determined this year that there were no collectability issues and that the notes remain fully collectible as of June 30, 2009 as reasonable.

The Committee inquired of Ms. Hammond what would lead to a conclusion that management’s assessment is not reasonable. Ms. Hammond responded that the auditor would look at financial performance, are they meeting milestones or original targets? Ms. Hammond encouraged management and the Committee to have a discussion regarding impairment testing, consider triggers for when something might be impaired. There is a lot of uncertainty in this area about these types of entities. She commented that every investment would be different and it would be difficult to create a policy.

Ms. Lawrence requested that a follow-up discussion regarding impairment testing be added to the agenda for next meeting.

Ms. Hammond and Ms. Katterhenry noted that management is currently conducting an impairment review on a quarterly basis and it is available to the board.

Audit Adjustments. Ms. Hammond noted there were no audit adjustments, the finance team and management team did a very good job in preparation for the audit. There were no uncorrected misstatements noted during the audit.

There were no disagreements or significant judgment, they were not aware of any consultations with outside accountants, there were no significant issues with extensive documentation. Ms. Hammond noted that the entire KBA staff was very well prepared for the audit work and she commended them on their hard work and assistance.

Ms. Katterhenry highlighted a few points from the Management’s Discussion and noted that there was one significant change from the July board meeting presentation, a receivable from Kansas, the estimate of $9.3 million was an actual $8.7 million, change from July board meeting financials. All the financials sent in the August President’s Report reflected the changes.

Ms Katterhenry referred to the footnote on the top of page 14 which reflects a portfolio investment is at cost unless there has been other than a temporary write-down then the investment will be written down and new cost basis will be established. Page 16 reflects the change in the policy for our cash investments which reflects shorter maturities.. Ms. Katterhenry also noted that in FY 2009 $626,000 was expended and recorded in construction-in-process and it is expected that in FY 2010 that account will be significantly higher as the KBA Venture Accelerator is constructed.

There being not further discussion, Ms Lawrence made a motion to recess into Executive Session.

Executive Session: Chairwoman Lawrence asked that the Committee recess into executive session to discuss the contract for auditing services and to consult with the auditor regarding audit matters.

Motion: Ms. Lawrence moved that the Audit Committee of the Kansas Bioscience Authority recess into executive session pursuant to K.S..A. 75-4319(b)(2) for the purposes of discussing matters deemed privileged under the attorney-client relationship. The executive session shall begin at 11:10 a.m. and continue for 10 minutes. The meeting will reconvene at 11:20 a.m. Included in the executive session will be all members of the Audit Committee, Jeff Ellis, legal counsel and Shelly Hammond, Vice President, Allen, Gibbs & Houlik, L.C. Mr. Robinson seconded the motion, which was unanimously approved. Mr. Thornton and Ms. Katterhenry were excluded from the first part of the Executive Session.

Return to Open Session: Upon motion made by Mr. Thornton and seconded by Dr. Robinson----- and unanimously approved, the Committee reconvened in open session at 11:20 a.m. Ms. Lawrence reported that the Committee asked all of the appropriate questions of the auditor during the Executive Session and were satisfied with the response. Mr. Tom Thornton reported that KBA staff did not have any issues regarding the auditors or the audit. Ms. Lawrence asked for a motion to approve the Audit, Mr. Bill Thornton moved to accept the Audit and present it to the full board, Governor Carlin seconded the motion, the motion passed unanimously.

Adjournment: There being no further business to come before the Committee, Mr. Robinson made a motion to adjourn the meeting. Mr. Bill Thornton seconded the motion and the meeting was adjourned at 11:30 a.m.